Who’s afraid of the big bad bear?

Commentary: Market’s dubious milestone shouldn’t scare investors

Stocks are skirting what the media and the analysts are calling “bear-market territory.” That’s the land that exists 20% below the high reached by the Standard & Poor’s 500
SPX, +0.34%
on April 29, and while the market didn’t stay in that range long, just touching it was enough to set investors and experts to talking.

It’s not that a bear market has actually snuck up on people, it’s more that crossing the line — especially if the market actually stays on the wrong side — feels dangerous.

Brent Wilsey of Wilsey Asset Management said he had heard from several clients on Tuesday asking “What are we going to do about this?”

“My response was ‘What do you want to do?’” the San Diego-based money manager said. “They don’t really have an answer for that; they just want to see something done. They don’t see the things that go into an investment decision, the analysis that says: ‘There are some good things to own right now, and we own them, so now we’re comfortable doing nothing.’ And the news makes them want to do something radical.”

Are we there yet?

There’s no denying that the non-stop news cycle can make almost anything look like a crisis, but the problem is that it turns ordinary landmarks and benchmarks into trigger points.

Landing so close to the edge of bear-market numbers can make investors do strange things; it can induce panic, get others to believe a market “reversal” is imminent and more, but none of those things should involve abandoning long-term strategies.

Think of trying to reach long-term financial goals like driving in a car with small children, passing mile markers and looking for ways to help the time pass. If you cross into a new state, you can cheer and get excited that you are closer to the goal, but you still have hours to travel and reaching the milestone really didn’t change that.

So when something bad comes up — think of bear-market territory like a traffic jam that slows the journey — being upset is understandable, but you’re not going to stop the car, leave it behind and start walking to your destination.

The issue is that the negative milestones confirm for investors that the doubts and worries they have are well-placed. It adds another piece of evidence that makes them question their strategy, and it amplifies their worries.

“How do [people] keep a capital markets perspective that is long term when they hear and read 24/7 that the world is coming to an end?” said Judy Shine of Shine Investment Advisory Services in Lone Tree, Colo.

“The normal human impulse is to do something,” he added. “Look at all the behavioral science studies that point to successful investors as those who are able to tune out the noise and focus on their goals. The markets are not meant to deliver positive experiences in a way that clients need. Will the capital markets deliver? Yes. In a way that you experience ‘good feelings?’ No.”

There’s very little good feeling in today’s markets, and no compelling reason to expect that to change.

Got to go through it

Market historians and value investors point to the legendary Sir John Templeton, who maintained that the most money is made by the people who stick it out during times of “maximum pessimism.”

But even Templeton talked about that ultimate panic point as being a short moment in time where the strongest investors keep their head while everyone else is bailing out.

The problem is that current market conditions don’t make anyone feel like the downturn will be a low “point.” Instead, it might be a low “trough” or a lengthy “bottom,” so that the prevailing pessimism casts a long shadow. It won’t be about surviving a moment of maximum pessimism and seeing the rapid rebound, but rather surviving a week, month, quarter or longer of gut-wrenching drops that make today’s volatility and movement feel like a kiddie ride.

“There comes a point when the market discounts every bit of bad news that can humanly happen, at which point it makes more sense to buy things then sell them, but that point doesn’t feel great, it’s not the point where most people feel happy about buying, they just know it makes the most sense,” said Andrew Morse, managing director of HighTower Advisors in New York. “We’re moving toward that point, and there are things worth buying along the way, but every time the market passes one of these milestones most people take it as a reason to sell.”

The common denominator that virtually every money manager seems to agree with is that to remain even remotely comfortable in these market conditions, investors have to be diversified and also have set aside a significant chunk of assets for emergencies and peace of mind.

After that, however, the question is whether you have reached that point where it makes more sense to be a buyer or a holder than a seller.

“A lot of people have money that doesn’t belong in the capital markets at all,” said Mark Travis, manager of the Intrepid Capital Fund
ICMBX, +0.17%
“But you can also look right now, in the middle of this economic mess, and find a lot that’s worth buying.

Johnson & Johnson
JNJ, +0.92%
is a “world-class” example,” he added. “You have a dividend that has grown for 25 years, and I am not sure it’s going to bother you if the S&P has crossed the 20% threshold to a bear market, because you know Johnson & Johnson is going to keep selling Band-Aids.”

It’s not that investors should ignore the signals that come with crossing into bear-market territory, it’s more that they should remember that investors who can step into the market when it makes them uncomfortable tend to do better than those who let the news define and determine their comfort zone.

Charles Mizrahi, editor of Inevitable Wealth Portfolio, suggested an exercise to help get investors past the headlines if the market re-crosses bear-market boundaries and stays there.

Every time you pay for something, Mizrahi said, add 25% to the total bill, so that you get a feeling for paying above fair-value on every transaction. Then, he said, imagine being able to make those same purchases and having a genie “pop out of your wallet, chant a few words and the bill is now discounted by 25%.”

“If that doesn’t get you excited,” Mizrahi said, “You’re dead. Now apply that same thinking to stock prices. When prices go down, you get to pay less and buy more. … If [people] forgot how they’re supposed to feel in bear markets, repeat the exercise.”

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